Receivables represent amounts owed to the firm as a result of the sale of goods or services in the ordinary course of business. These are claims of the firm against its customers and form part of its current assets. Receivables are also known as accounts receivable, trade receivables, customer’s receivables or book debts. The receivables are carried for the customers. The period of credit and extent of receivables depend upon the credit policy followed by the firm. The purpose of maintaining or investing in receivables is to meet competition and to increase sales and profit. Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivables are listed on the balance sheet as a current asset. AR is any amount of money owed by customers for purchases made on credit. Accounts receivable is an asset account on the balance sheet that represents money due to a company in the short term. Accounts receivables are created when a company lets a buyer purchase their goods or services on credit.
COST OF MAINTAINING RECEIVABLES:
- Capital Costs
Maintenance of accounts receivable results in blocking of the firm’s financial resources in them. This is because there is a time lag between the sale of goods to customers and the payments by them. The firm has, therefore, to arrange for additional funds to meet its own obligations, such as payment to employees, suppliers of raw materials, etc., while waiting for payments from its customers. Additional funds may either be raised from outside or out of profits retained in the business. In first the case, the firm has to pay interest to the outsider while in the latter case, there is an opportunity cost to the firm, i.e., the money which the firm could have earned otherwise by investing the funds elsewhere.
- Administrative Costs
The firm has to incur additional administrative costs for maintaining accounts receivable in the form of salaries to the staff kept for maintaining accounting records relating to customers, cost of conducting an investigation regarding potential credit customers to determine their credit worthiness etc.
- Collection Costs
The firm has to incur costs for collecting the payments from its credit customers. Sometimes, additional steps may have to be taken to recover money from defaulting customers.
- Defaulting Costs
Sometimes after making all serious efforts to collect money from defaulting customers, the firm may not be able to recover the over dues because of the inability of the customers. Such debts are treated as bad debts and have to be written off since they cannot be realised.